Offshore wind farms in future meshed offshore grids could be subject to different regulatory regimes. Feed-in tariffs would absorb market risk from wind farm operators, whereas price premium mechanisms leave operators exposed to market price signals. In this case, it plays a decisive role which price applies to a node in an offshore grid.
The offshore node will either be integrated into any of the neighbouring markets, with access to the respective maximum price, or be subject to separate nodal pricing. We investigate the different regulatory regimes for connections to one to four countries based on a stochastic model capturing uncertainties in prices and line failures.
The stochastic analysis shows that in case the wind park is granted access to the respective maximum price, there is a significant option value connected to the operational flexibility of accessing several markets: The wind farm’s IRR can increase by up to 33% in the analysed (fictive) cases when connected to four neighbouring countries. Contrarily, in case of nodal pricing, the wind farm will have to cope with IRRs that are up to 15% lower when connected to more than one country. These effects can either hamper adequate investment or lead to windfall profits, if the level of support were not adjusted according to the choice of regulatory regime. This should therefore be considered when designing the regulatory regime and level of support in the offshore grid in order to maintain an effective and efficient development of offshore wind in Europe.